Income Distribution and Household Saving: A Non-Monotonic Relationship

Based on a panel of 29 advanced economies, this paper documents a non-monotonic link between inequality and the aggregate household saving rate. It finds that, at a low level of inequality, more inequality is associated with higher saving; but it also shows that a negative relationship between inequality and saving prevails, where inequality is high. Using different empirical approaches, we locate the turning-point at a net income Gini coefficient around 30. Moreover, we show that the relationship between inequality and saving depends on financial market conditions. While inequality increases saving, when credit is scarce, it tends to reduce saving at high levels of financial depth.